Which action is recommended when a business is borrowing too much money?

Which action is recommended when a business is borrowing too much money?

• A. Use equity over debt
• B. Increase debt
• C. Cut costs only
• D. Apply for grants

Answer: (A)

When a business is borrowing too much, the priority is to reduce financial risk by changing the mix of funding away from fixed debt toward equity. Equity financing provides capital from owners or new investors without mandatory interest payments or principal repayments. This lowers the debt-to-equity ratio (gearing), eases cash‑flow pressure, and strengthens solvency, making the business less vulnerable to downturns or rising interest costs. Cutting costs can improve cash flow but doesn’t address the underlying financing structure, so it won’t rebalance risk as effectively. Increasing debt would add to the burden and raise the risk of default. Grants could help, but they’re often uncertain, time‑bound, and not a dependable way to manage ongoing leverage. Thus, shifting funding to equity is the best way to reduce over-reliance on borrowing and improve financial stability.

When a business is borrowing too much, the priority is to reduce financial risk by changing the mix of funding away from fixed debt toward equity. Equity financing provides capital from owners or new investors without mandatory interest payments or principal repayments. This lowers the debt-to-equity ratio (gearing), eases cash‑flow pressure, and strengthens solvency, making the business less vulnerable to downturns or rising interest costs.

Cutting costs can improve cash flow but doesn’t address the underlying financing structure, so it won’t rebalance risk as effectively. Increasing debt would add to the burden and raise the risk of default. Grants could help, but they’re often uncertain, time‑bound, and not a dependable way to manage ongoing leverage.

Thus, shifting funding to equity is the best way to reduce over-reliance on borrowing and improve financial stability.